There is growing evidence that the deal for Greece reached in July is unravelling. On Sunday, German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached the agreement in July. He cited a “great risk” that the crisis could spread further. In Heralding a new Greek PSI?, 7 October 2011, we discuss the latest developments and the different forms a revised restructuring (with more PSI) might take.
Acknowledging the heightened risk of contagion, German chancellor Angela Merkel and French President Nicolas Sarkozy, racing to stamp out the euro debt crisis that threatens to spread to the financial system, gave themselves three weeks to devise a plan to recapitalise banks, get Greece on the right track and fix Europe’s economic governance. “By the end of the month, we will have responded to the crisis issue and to the vision issue”, the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office. Under rising pressure to defuse the turmoil that has raged for 18 months and facing growing concern Greece is headed to a default, Mrs Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Mr Sarkozy said they would deliver a plan by the 3 November Group of 20 summit. The focus on Europe’s banks and the search for what each called a “durable” solution for Greece signal a willingness to accept a debt restructuring there, an outcome Mr Sarkozy had so far resisted. However, the two leaders unveiled no new agreement on what role should be played by the bailout fund, the European Financial Stability Facility, amid reports that they differed on how to use it. “We will recapitalise the banks”, Mr Sarkozy said. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing”. (Bloomberg)
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